The large payment brands fiddle while Rome burns, seemingly unaware
of the approaching bitcoin onslaught that is free of processing fees and
political boundaries.

One of those barbarians at the gate,
formerly known as WalletBit, has broadened its functionality and cut its
pricing to expand directly into merchant processing. The company, based
in Denmark, has rebranded itself Bitcoin Internet Payment System, or BIPS.

Best
of all is that BIPS’ merchant tools and digital wallet services will be
free unless, of course, conversion to national currencies is required,
in which case it will charge 2.5% to convert out of bitcoin. Denmark and
Canada have special reduced cash-out rates with same-day interbank
transfers for Canadian accounts, says BIPS Director of Marketing Adam Harding. The strategy is to make it
easy for merchants to get started and then aggregate their bitcoin
balances with the company, which will make money over time providing
foreign exchange conversion and premium services to the client.

This
approach directly challenges the leading bitcoin merchant processor,
BitPay, which just received yet another follow-on round of funding, and
U.S.-only Coinbase, which appears to have a good future on the merchant
side of the business.

Bitcoin's appeal to merchants is not only
the lack of chargebacks and interchange fees but also the broadening of
the customer base to include consumers from about 60 countries not served by PayPal.
Also, traditional credit card products are typically not available in
many countries either for political reasons, higher fraud rates, or lack
of retail credit infrastructure.

The business model for bitcoin
merchant processing was bound to mature and evolve, because an
intermediary processor is not inherently required in this alternative
payment system. In the world of Visa and MasterCard, it makes sense to
have someone process transactions because authorization and settlement
services are needed. But with bitcoin, the pure merchant processors are
an interim step at best since third-party authorizations and chargebacks
are not part of the architecture due to the distributed nature of
transaction confirmation on the bitcoin block chain.

What's
important to merchants is the coin management with various mobile apps
and shopping cart plug-ins as well as the optional foreign exchange
conversion. This is where the industry is headed and BIPS realizes that.
Merchant
plug-ins are becoming commoditized and foreign exchange options are
driven by strong partnerships with domestic and international financial
institutions. This leaves the wallet technology as the wedge for
innovative differences, such as management reporting capabilities and
online secure access. All of the current so-called merchant processors
offer online wallets that are under the control of the operator, meaning
that bitcoin private keys are stored and protected by the operating company.

I
believe that online wallets, or eWallets, that do not store the
client’s private key, such as BlockChain's My Wallet and StrongCoin,
have an advantage in the long term because this setup removes the need
to trust and audit the company's procedures. Although performing the
cryptographic operations in the browser has its own challenges, the
risks are reduced substantially compared to a localized breach since the
threats to non-private-key-holding wallets are limited to a
man-in-the-middle attack or a court order demanding “rogue” javascript delivery (the browser equivalent of a wiretap).

As
bitcoin wallet functionality becomes more mature and robust, merchants
will simply elect to partner with the best standalone client wallets and
the best eWallets. If and when those accumulated bitcoin balances need
to be exchanged for national currencies, then the wallet providers with
the most attractive conversion options and limits will be the leaders.

BIPS
has an advantage here because it supports 42 different currencies for
converting out of bitcoin at 2.5%, whereas BitPay supports 11 different
currencies at 2% fee, and Coinbase offers cash-out only in U.S. dollars
at 1% with strict limits. Additionally, the cost of conversion has to be
looked at in conjunction with the merchant processing fees. On that
score BIPS and Coinbase are free while BitPay charges 0.99%. So, for
merchants choosing to store bitcoin with the processor rather than
convert it to government currency, BIPS and Coinbase are zero charge.
(For a merchant that takes in 10% or less of its monthly sales in
bitcoin, storing it with the processor can be an inexpensive way to
acquire the currency and have a market position.)

Looking towards
the future, barriers to entry are very low for the bitcoin merchant
processing business. The differentiators for success will be online
wallet security configurations, foreign exchange conversion options, and
merchant software tools – in that order. With the market spread
regionally now, it's still a jump ball.

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About Me

I am an e-Money researcher and a Founding Director of the Bitcoin Foundation. My career has included senior influential posts at Sumitomo Bank, VISA, VeriSign, and Hushmail.

"Free-market protagonists, such as Matonis, regard cybercash as better than traditional government-issued or -regulated money, because it is determined by market forces and thus nonpolitical in nature." --Robert Guttmann, Professor of Economics at Hofstra University, in Cybercash: The Coming Era of Electronic Money, 2002

"Matonis is quite correct that the new technology makes easier the use of multiple private currencies." --Mark Bernkopf, Federal Reserve Bank of New York, in "Electronic Cash and Monetary Policy", 1996

"Matonis argues that what is about to happen in the world of money is nothing less than the birth of a new Knowledge Age industry: the development, issuance, and management of private currencies." --Seth Godin in Presenting Digital Cash, 1995